Accounting and Finance Seminar - Cyril Monnet (Bern)
G.15, 15-19 Tyndalls Park Road
On the Instability of Banking and Other Financial Intermediation
Are Financial intermediaries inherently unstable, and if so, why? To address this we analyze whether model economies with Financial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Several formalizations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with fixed costs and delegated investment as in Diamond; one with bank liabilities serving as payment
instruments similar to currency in Lagos-Wright; and one with intermediaries as dealers in decentralized asset markets, similar to Duffie et al. Although the economics and mathematics differ across specifications, in each case financial intermediation engenders instability in a precise sense.